Many investors have shifting ideas about how much cash to maintain as part of their portfolios. For speculators seeking extraordinary gains, this mental tug-of-war can get almost violent. The opportunity cost of leaving cash uninvested is much higher. That makes even a modest amount of interest on cash painful to endure.
So, what’s the ideal cash position for speculators?
I’m sure it’ll be no surprise for me to say that one size doesn’t fit all, and that’s certainly true.
There’s a lot more to it than that, of course.
Sure, people with little appetite for risk will feel better—and perhaps trade better—with a larger amount of cash on hand…
But the market context is important. Great reasons to hold more cash include if:
- Markets look frothy and poised for a crash.
- The economy is on the skids and could go off the rails.
- If real interest rates were so high, great returns were possible with very little risk.
- There actually was deflation.
- We’re accumulating for a large bet we expect to be able to make soon.
- Others (to each her or his own).
All these factors come and go.
My current view is that reasons #1 and #2 do justify a greater allocation to cash.
Back in my Casey Research days, we used to say that the way to rig for stormy financial weather, going to 1/3 cash, 1/3 gold and related equities, and 1/3 other investments. I remember writing about this in 2007. It worked out well in the meltdown of 2008.
Today, I’m personally mostly in real estate, gold and silver bullion, and stocks in gold, silver, copper, uranium, and other resource companies. I consider this a “hardened” portfolio in case either #1 or #2 comes true—at least, a lot more damage-resistant than holding today’s Wall Street darlings.
My cash position in my brokerage accounts is over 50%.
This is neither normal nor ideal.
My large cash position is partly because I’m concerned about a market crash. That could easily happen if investors see that Emperor Fed has no clothes—i.e., “tools” to deal with inflation when the economy is weak. The risk is even greater if the Fed tries to use its tools (raising rates).
It’s also in large part because I’ve booked some recent wins in The Independent Speculator, and I haven’t yet redeployed into new speculations.
If I were absolutely convinced a marched crash was imminent, I might have this much cash, or more, on hand. But of course, no one knows that in advance, not for certain. And holding cash causes significant cognitive dissonance when the average gain in my current portfolio is in the solid double-digits.
Given the level of risk I perceive, and that there’s still money to be made without a crash, the old Casey “stormy weather” formula seems reasonable to me.
This is why, despite my very real concern about a market crash, I have not stopped buying and am looking to deploy more cash in the nearest term.
Is there a Minimum Cash Allocation?
I do think it’s a good thing to always have enough cash on hand to deploy into a meaningful investment.
Great truly speculations are rare things—it’s painful to find one, and not have enough cash to buy in.
Been there, don’t want to do that again.
It’d be truly agonizing if a “once in a lifetime” opportunity popped up.
That said, if there were no storm clouds on the horizon, that level would be much less than 1/3.
How much lower? Well, if I was retired and living on capital gains, dividends, interest, etc., but still considered myself a speculator, it might be higher. Maybe 20%.
If I considered myself an investor, primarily, with a small part of my portfolio dedicated to speculation, my overall minimum cash position would be higher, even when not rigged for stormy weather. But my speculative portfolio would not have a lot of cash in it—the opportunity cost of not deploying it is too high.
In my actual case, however, I’m still generating new income and can replace losses I take. That makes my allocation to cash in calm weather much lower. Ideally, less than 10%... maybe even as low as 5%.
I’m here to make money—not just watch others do so.
In fact, I don’t think of minimum cash as a percentage of my portfolio. I think of it as: “What’s the least amount of money I’d need to put into a 10-bagger for such a result to make a material difference for me?”
Each of us must weigh our own appetite for risk, ability to recover from losses, and our own view of market conditions to determine an allocation to cash that works for us.
Note that I don’t say is “right” or “ideal.”
Those are potentially dangerous abstractions in our constantly changing financial world.
That’s all the more so now that The Powers That Be have sailed the global economy so far into uncharted waters, they don’t even know how to get back to terra firma.
That’s my take,
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